Get rich with dividends (2012)

17 Chapter 3 Past Performance Is No Guarantee of Future Chapter 4 Why Companies Raise Dividends 53 Chapter 5 Get Rich with Boring Dividend Stocks Chapter 6 Get Higher Yields and Maybe

Get Rich with Dividends

Marc Lichtenfeld’s name may be hard to pronounce, but his guide

book is easy to implement He practices what he preaches with his

incredibly successful Perpetual Income Portfolio at the Oxford

Club His book should be called Get Rich Sooner than You Think

Investing in stocks that pay steady and rising dividend will make

you a fortune you can enjoy while you’re still young!

—Mark Skousen, Editor, Forecasts & Strategies

Marc has put together a New Bible for Investing And in the

pro-cess, he’s debunked one of Wall Street’s most widely held beliefs:

that the average investor simply cannot outperform the market

He can! All it takes is a little legwork to fi nd great companies that

pay steady, rising dividends And Marc’s step-by-step system makes it

easy So put it to work, get rich, and start spreading the good news

—Louis Basenese, chief investment strategist, Wall Street Daily

Speculators can get lucky occasionally They can even get rich once

in a while But if you want to build wealth consistently, you have to

let your money work for you There is only one time-tested strategy

for doing this and that is through dividends and reinvesting those

dividends However, investing in dividends is a strategy Fortunately,

you now have one of the best guides and guidebooks in the

busi-ness Marc Lichtenfeld is an accomplished researcher, with years of

experience in the fi eld of investing and dividends His information

is well thought out, well researched, and well written Save yourself

some time and set yourself up with a perpetual money machine

by reading and following Marc’s advice—religiously! You will get

rich . . . or richer by doing so

—Karim Rahemtulla, editor, Wall Street Daily; author, Where in the World Should I Invest: An Insider’s Guide to

Making Money Around the Globe

Get Rich with Dividends

Get Rich with Dividends

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Lichtenfeld, Marc.

Get rich with dividends : a proven system for earning double-digit returns /

Marc Lichtenfeld — 1st ed.

p cm — (Agora series ; 80)

Includes index.

ISBN 978-1-118-21781-8(Hardcover); ISBN 978-1-118-28636-4 (ebk);

ISBN 978-1-118-28395-0 (ebk); ISBN 978-1-118-28234-2 (ebk)

1 Dividends 2 Portfolio management I Title.

in the most important way

Contents

Foreword by Alexander Green ix

Chapter 1 Why Dividend Stocks? 1

Chapter 2 What Is a Perpetual Dividend Raiser? 17

Chapter 3 Past Performance Is No Guarantee of Future

Chapter 4 Why Companies Raise Dividends 53

Chapter 5 Get Rich with Boring Dividend Stocks

Chapter 6 Get Higher Yields (and Maybe Some Tax Benefi ts) 83

Chapter 7 What You Need to Know to Set Up a Portfolio 99

Chapter 8 The 10-11-12 System 121

Chapter 9 DRIPs and Direct Purchase Plans 147

Chapter 10 Using Options to Turbocharge Your Returns 153

Chapter 11 Foreign Stocks 165

Foreword

When it comes to the stock market, most investors prefer

glam-our to profi ts

Why do I say this? Tell average investors about a company with a

cutting-edge technology, an exciting Phase III drug, or a new gold

strike and they are all ears But tell them about a blue chip stock

with steady sales, a big order backlog, and a rising dividend yield

and they are more likely to stifl e a yawn

That’s unfortunate Because, contrary to what most investors

believe, startling innovation is not a good predictor of business

success Or, as the famous industrialist and steel magnate Andrew

Carnegie succinctly put it, “Pioneering don’t pay.”

A young company that is just feeling its oats—and retaining all

its earnings—is unlikely to be the best long-term investment It’s a

widely recognized fact that 80% of new businesses fail in the fi rst

fi ve years

What really makes money for investors over time—and

with-out the hair-raising volatility of hypergrowth stocks—is steady

busi-nesses paying regular dividends

For example, over the past decade, with dividends reinvested,

oil producer Chevron Corp has returned 200% Altria Group,

the U.S tobacco giant, has returned more than 300% Even

musty old Con Edison, originally founded as New York Gas Light

Company—a utility that was born 23 years before Thomas Edison—

has returned 130% over the period

In this excellent new book, my friend, colleague, and fellow

analyst Marc Lichtenfeld shows you how and why to invest in great

dividend stocks And let me make two things clear at the outset

Number one, you could not fi nd a more worthy, knowledgeable, or

trustworthy guide to the investment landscape And, second, this

investment approach really works

How can I be sure? Marc runs the Oxford Club’s Perpetual Income

Portfolio, a portfolio based solely on growth and income

invest-ments He has done a superb job In fact, when I looked at the returns

recently, I had to ask him, “Holy crap, Marc How do you do it?”

Fortunately, Marc shows you how you can earn returns like this

yourself He has made me a believer At investment seminars today,

I tell attendees, if you are looking for growth, invest in dividend

stocks If you are looking for income, invest in dividend stocks If

you are looking for safety, invest in dividend stocks

Why? Earnings may be suspicious due to creative accounting

Revenues can be booked in one year or several years Capital assets

can be sold and the value listed as ordinary income But cash paid

into your account is a sure thing, a litmus test of a company’s true

earnings It’s tangible evidence of a fi rm’s profi tability

Regular payouts impose fi scal discipline on a company And

his-tory reveals that dividend-paying stocks are both less risky and more

profi table than most stocks

Dr Jeremy Siegel, a professor of fi nance at the Wharton School

of the University of Pennsylvania, has done a thorough historical

investigation of the performance of various asset classes over the

last 200 years, including all types of stocks, bonds, cash, and

pre-cious metals His conclusion? High-dividend payers have

outper-formed the market by a wide margin over the long haul

There is an awful lot of fear and anxiety about the economy and

the stock market today Investors are understandably confused

and uncertain about what to do with their money

Marc Lichtenfeld has your solution He demonstrates that even

during market declines, dividend-paying stocks hold up better

than non-dividend-paying stocks and often fi ght the broad trend

and rise in value The reason is obvious: These tend to be mature,

profi table companies with stable outlooks, plenty of cash, and

long-term staying power

Bear in mind that U.S companies are sitting on a record

amount of cash right now, more than $2 trillion Companies are

not hiring, and they’re not boosting spending So a lot of this cash

is rightfully going back to shareholders The Dow currently yields

more than bonds And dividend growth among U.S companies has

averaged 10% per year over the last two years, more than double

the long-term dividend growth rate

The current outlook is especially promising Over the last 50

years, for instance, the highest 20% yielding stocks in the Standard

& Poor’s 500 returned 14.2% annually That’s good enough to

dou-ble your money every fi ve years—or quadruple it in ten And if you

were even more selective, say investing only in the ten

highest-yield-ing stocks of the 100 largest companies in the S&P 500, your annual

return would have been even better, 15.7%

I should add the standard caveat here about past performance

and point out that there are risks with dividend stocks too As Marc

points out, an investor would be foolish to plunk down money for

a stock just because the dividend is large You have to be selective

The market is full of “dividend traps,” troubled companies that pay

hefty dividends to keep investors from bailing out

In the pages that follow, you’ll learn how to avoid those and

zero in on potential winners Marc shows you how to look at cash

fl ow and payout ratios and whether the dividend is sustainable

Does this require a bit of legwork? Yes, but the payoff is large

It astonishes me that investors are willing to lend money to the

U.S Treasury for the next ten years at less than 2% What a terrible

bet, one that virtually guarantees a negative, real (after infl ation)

return over the next decade

A far better bet is a diversifi ed portfolio of dividend-paying

stocks Over the eight decades through 2010, dividends

contrib-uted 44% of the U.S stock market’s return, according to Fidelity

Investments Sometimes it was much more During the 1970s, for

example, dividends generated 71% of returns

Marc makes a strong case that dividend stocks today represent

a historic opportunity Not only are U.S companies fl ush with cash,

but payouts are less than one third of profi ts, a historic low

Dividends alone won’t generate a mouth-watering return But

they will rise over time—and surprising things happen when you

reinvest them Picture a snowball rolling down hill

Albert Einstein understood this As he observed, money

com-pounding “is the most powerful force in the universe.” And the

best way to compound your money? Great companies that pay

steady, rising dividends

This book is your key because Marc Lichtenfeld does a great job

of showing you just where to fi nd them

Alexander Green

Preface

It was a eureka moment

I was working on a dividend spreadsheet, changing the

vari-ables, when the size of the numbers surprised me I realized that if

my kids’ money was invested according to the formula I was

work-ing with, they should never have any fi nancial problems in

adult-hood, no matter what job or career they choose

I also realized that using the same formula, my wife and I should

never have to worry about income in retirement

And, last, I understood that if my parents invested according to the

formula, they too should have no worries about income in old age

That’s when I knew I had to write this book

Get Rich with Dividends is for the average investor—the investor

who is just getting started and the investor who is playing catch-up,

the investor who has been burned by the booms and busts of the

past decade and the investor who trusted the wrong advisor and

ended up paying thousands of dollars for worthless advice

This book is for any investors who are serious about creating

real wealth for themselves and their families Investors who are

will-ing to learn a simple system for makwill-ing their money work as hard

as they do (or did) It’s easy to learn and implement and takes very

little free time Importantly, it’s not a theory It’s been proven to

work over decades of bull and bear markets

And it’s designed for investors who have other things they’d

rather do than spend hours on their portfolios Implement the

10-11-12 System and let stocks and time work their magic All that’s

required is the occasional check-in from you to make sure the

com-panies in your portfolio are still behaving the way you expect them

to If they are (and you’ll learn how to pick companies that are most

likely to meet your expectations), no further action is necessary

As the editor of the Oxford Club’s Ultimate Income Letter , I receive

e-mails every month from investors who are yearning for higher

yield In today’s low-rate environment, current yields aren’t

cut-ting it for many retirees I was inspired to fi nd a strategy that would

ensure today’s investors will not be in the same boat in the future as

today’s income seekers, who are taking on too much risk by chasing

yield

The 10-11-12 System outlined in Get Rich with Dividends will

enable investors to achieve yields of at least 11% (and possibly

much more) in the next ten years—all while investing in some of

the most conservative stocks in the market These are companies

with track records, some decades long, of taking care of

sharehold-ers And if you don’t need the income today, 12% average annual

total returns (which crush the stock market average) are easily

attainable Earning 12% per year more than triples your money in

10 years, quintuples it in 15 years, and grows it by almost 10 times

in 20 years In other words, earning an average of 12% per year

for 20 years turns a $100,000 portfolio into nearly $1 million And

that’s with no additional investments

What would an extra $1 million mean to you in retirement?

First of all, it might spin off enough income that you wouldn’t need

to touch the principal The money could be used for vacations with

your family, a grandchild’s college education, or peace of mind that

you’ll always have the best medical care

Perhaps most important, you’ll learn how my 10-11-12 System

can still enable you to earn signifi cant yields and double-digit

returns in fl at or down markets Should a nasty bear market occur,

you’ll still be sleeping comfortably, even smiling, once you

imple-ment my 10-11-12 System

As you make your way through this book, you’ll learn

every-thing you need to know to become a successful investor It’s easy to

read and even easier to get started

In Chapters 1 and 2, we go over why dividend stocks are the

best kind of investment you can make for the long-term health of

your portfolio Since you don’t want to invest in just any old

com-pany paying a dividend, we discuss the special kind of stocks that

you should select and how to fi nd them

I don’t expect you to take my word for the claims I’m making,

so in Chapter 3, I show you how I arrived at the various numbers,

taking you through examples of how your income and total return

can grow each and every quarter and illustrate how the 10-11-12

System still works and even thrives in bear markets

In Chapter 4, we look at the big picture and the reason

compa-nies pay dividends You’ll learn why dividends are an important

fac-tor in determining the health of a business

You’ll see why certain conservative stocks are your best bet in

Chapter 5 There’s no reason to take excess risk to achieve your

goals when some of the most conservative stocks on the market will

achieve better results

Chapter 6 discusses some interesting types of stocks you may

not be aware of—stocks that typically yield more than regular

divi-dend payers

In Chapter 7, we lay the foundation for your portfolio Chapter 8

is where you’ll learn all about the 10-11-12 System that you’ll use to set

you and your family up for long-term double-digit yields and returns

In Chapters 9, 10, and 11, we go over DRIP programs, options,

and foreign stocks—all ways to turbocharge your returns

Chapter 12 discusses everyone’s favorite subject: taxes Even

if a CPA does your taxes for you, be sure to read this chapter; it

contains important information that could make your investments

much more tax effi cient

And we wrap everything up in the conclusion and set you on

your way to a lifetime of market-crushing returns and nights of

worry-free (at least about your portfolio) sleep

The strongest endorsement of the 10-11-12 System that I can make

is this: I’m using it for my investments and for my kids’ money as well

Writing this book has been a labor of love because I know there

will be thousands of families who will achieve fi nancial freedom, be

able to send a kid to college, make a down payment on a house, and

enjoy retirement as a result of following the 10-11-12 System

I’m glad yours will be one of them

1

C H A P T E R

Why Dividend Stocks?

Let me start by making a bold statement: The ideas in this book

are one of the most important gifts you can give to yourself or

your children On the pages that follow is the recipe for

generat-ing 11% yields and 12% average annual returns for your portfolio

Signifi cantly more if the stock market or your particular stocks

cooperate

I’m not trying to brag I wasn’t the one who thought up this

strategy I just repackaged it in a compelling, easy-to-read book that

you will want to buy more copies of for all your friends and family

Or at least lend them yours

If you follow the ideas in this book and teach them to your

children, it’s very conceivable that many of your concerns about

income in the future will be over And perhaps just as important,

if your children learn this strategy at a young age, they may never

have fi nancial diffi culties They will have the tools to set themselves

up for income and wealth far before they are ready to retire

Keep in mind that I cannot teach you or your kids how to save

If you would rather buy a new car at the expense of putting money

away, I can’t and won’t attempt to fi x that This book is for the

people who already know how to save and are trying to make that

money work as hard as they do

As far as saving money is concerned, the only advice I’ll offer

can be found in one of my favorite fi nance books, The Richest Man

in Babylon , by George S Clason In that book, fi rst published in

1926, Clason writes: “For every ten coins thou placest in thy purse

take out for use but nine Thy purse will start to fatten at once and

its increasing weight will feel good in thy hand and bring

satisfac-tion to thy soul.”

Many personal fi nance gurus proclaim the same advice, but

with a more modern bent to it, stating “Pay yourself fi rst.”

Even if you are not able to save 10% of your current income,

saving anything is crucial As you will see, the money you save and

invest using the ideas in this book will grow signifi cantly over the years

So if you can only save 8% or 5% or even 2%, start doing it now And

if you get a raise or an inheritance or win the football pool, do not

spend a dime of it until you have put away 10% of your total income

Here are some scary statistics According to the Employee

Benefi ts Research Institute, only 14% of Americans believe they

will have enough money to retire comfortably Even worse, 60% of

workers reported household savings of less than $25,000

If you are serious about improving your family’s fi nancial

future—and I know you are because you’re investing the time to

read this book—start saving today, if you haven’t already

Imagine if you saved 10% of your money and put it into the

kinds of dividend stocks discussed in this book Over time, your

wealth should grow to the point that it will have generated signifi cant

amounts of income, perhaps even replacing the need to work

This is the last point I will make about saving You didn’t spend

your money on this book (or drive all the way to the library) just to

have me beat you up about saving Instead, I will assume you really

are serious about securing your future and want to learn how to

take those funds and add a few zeros to the end of the total number

in your portfolio

And if you’re already retired and need income right away, the

strategies in this book can help you too You may not have the

abil-ity to compound your wealth, but you can invest in companies that

will generate more and more income for you every year Not only

can you beat infl ation, but you can also give yourself and even your

loved ones an extra cushion

There are lots of ways to invest your hard-earned money But

you’ll soon see why investing in dividend stocks is a conservative

way to generate signifi cant amounts wealth and income This isn’t

theory It’s been proven over decades of market history

Some people believe that real estate is the only way to riches

Others say the stock market is rigged so that the only people who

make money are the professionals—therefore, you should be in

the safety of bonds Still others only trust precious metals None of

these beliefs is true at all

Within the stock market, there are various strategies that are

valid Value investors insist you should buy stocks when they’re cheap

and sell when they’re expensive Growth investors believe you should

own stocks whose earnings are growing at a rapid clip Momentum

investors suggest throwing valuation out the window and

invest-ing in stocks that are movinvest-ing higher—and gettinvest-ing out when they

stop climbing

Still others only trust stock charts They couldn’t care less what

a company’s earnings, cash fl ow, or margins are As long as it looks

good on the chart, it’s a buy

Each of these methodologies works at some point Value and

growth strategies tend to switch on and off: One will be in favor

while the other is out until they trade places For one stretch of

time, value stocks outperform Then for another few years, growth

will be stronger Eventually, value will be back in fashion

Whichever is in vogue at the moment, supporters of each will

come up with all kinds of statistics that prove their method is the

only way to go

The same dynamic applies when it comes to fundamentals

ver-sus technicals The technical analysts who read stock charts assert

that everything you need to know about a company is refl ected

in its price and revealed in the charts Fundamental analysts, who

study the company’s fi nancial statements, maintain that technical

analysis is akin to throwing chicken bones and reading tealeaves

There are plenty of other methodologies as well These include

quantitative investing, cycle analysis, and growth at a reasonable

price (GARP) to name just a few more

Diehard supporters of all these strategies claim that their way

is the only way to make money in the markets It’s almost like a

religion whose most fanatical followers act as if their beliefs are

the only truth—period, no debate, end of story They’re right and

you’re wrong if you don’t believe the same thing they do

I’m no authority when it comes to theology But when it comes

to investing I know this: Dogma does not work

You will not consistently make money investing only in value

stocks Again, sometimes they’re out of favor If you only read stock

charts, sometimes you’ll be wrong Charts are not crystal balls

Quantitative investing tends to work until it doesn’t Just ask the

inves-tors in Long Term Capital Management, who lost everything in 1998

Long Term Capital was a $4.7 billion hedge fund that utilized

complex mathematical models to construct trades It made a lot

of money for investors for several years It was supposed to be

fail-proof But like the Titanic , which was also supposed to be

unsink-able, Long Term Capital hit an iceberg in the form of the Russian

fi nancial crisis and nearly all was lost

“Y’all Must’ve Forgot”

During his prime, legendary boxer Roy Jones Jr was one of the best

fi ghters that many fans had ever seen However, Jones didn’t seem

to get as much respect as he thought he deserved So, in 2001, he

released a rap song that listed his accomplishments and reminded

fans about just how good he was The song was titled “Y’all Must’ve

Forgot.” Roy was a much better fi ghter than he was a rapper The

song was horrendous

Looking back, investors in the mid- to late 1990s remind me

of boxing fans in 2001, when Roy released his epic tribute to

him-self Both groups seemed to have forgotten how good they had

it— boxing fans no longer appreciated the immense skills of Jones,

while investors grew tired and impatient with the 10.9% average

annual returns of the Standard & Poor’s (S&P) 500 (including

dividends), since 1961 After decades of investing sensibly, in

com-panies that were good businesses that often returned money to

shareholders in the form of dividends, many investors became

spec-ulators, swept up in the dot-com mania

I’m not blaming anyone or wagging my fi nger I was right there

with them During the high-fl ying dot-com days, I was trading in

and out of Internet stocks too My fi rst “ten bagger” (a stock that

goes up ten times the original investment) was Polycom (Nasdaq:

PLCM) I bought it at $4 and sold some at $50 (I sold up and down

along the way)

However, like many dot-com speculators, I got caught holding

the bag once or twice as well I probably still have my Quokka stock

certifi cate somewhere in my fi les Never heard of Quokka? Exactly

The company went bankrupt in 2002

With stocks going up 10, 20, 30 points or more a day, it was

hard not to get swept up in hysteria

And who wanted to think about stocks that paid 4% dividends

when you could make 4% in about fi ve minutes in shares of Oracle

(Nasdaq: ORCL) or Ariba (Nasdaq: ARBA)?

Did it really make sense to invest in Johnson & Johnson (NYSE:

JNJ) at that time rather than eToys? After all, eToys was going to

be the next “category killer,” according to BancBoston Robertson

Stephens in 1999 Interesting to note that eToys was out of business

18 months later and BancBoston Robertson Stephens went under

about a year after that

If, in late 1998, you invested in Johnson & Johnson, a boring

stock with a dividend yield of about 1.7% at that time, and reinvested

the dividends, in late 2011, you’d have made about 8.6% per year

on your money A $3,000 investment would have nearly tripled

Johnson & Johnson is a real business, with real products and

revenue It is not as exciting as eToys or Pets.com or any of the hot

business to business (B2B) dot-coms that took the market by storm

But 13 years later, are there any investors who would complain

about an 8.6% annual return per year? I doubt there are very many—

especially when you consider that the S&P 500’s annual return,

including reinvested dividends, was just 2% during the same period

Now, you might have gotten lucky and bought eBay (Nasdaq:

EBAY) at $2 per share and made 16 times your money Or maybe

you bought Oracle and made 5 times your money But for every

eBay and Oracle that became big successful businesses, there were

several Webvans that failed and whose stocks went to zero

In the late 1990s, the stock market became a casino where

many investors lost a ton of money and didn’t even get a free ticket

for the buffet It doesn’t seem that we’ve ever completely returned

to the old way of looking at things

My grandfather, a certifi ed public accountant who owned a seat

on the New York Stock Exchange, didn’t invest in the market

look-ing to make a quick buck He put money away for the long term,

expecting the investment to generate a greater return than he would

have been able to achieve elsewhere (and possibly some income)

He was willing to take risk, but not to the point where he was

speculating on companies with such ludicrous business ideas that

the only way to make money would be to fi nd someone more

foolish than he to buy his shares This is an actual—and badly

fl awed theory used by some Not surprisingly, it is called the

Greater Fool Theory

There were all kinds of companies, TheGlobe.com, Netcentives,

Quokka, to name just a few, whose CEOs declared we were in a new

era: This time was different When I asked them about revenue,

they told me it was all about “eyeballs.” When I pressed them about

profi ts, they told me I “didn’t understand the new paradigm.”

Maybe I didn’t (and still don’t) But I know that a business has to

eventually have revenue and profi ts At least a successful one does

I’m 100% certain that if Grandpa had been an active investor in

those days, he wouldn’t have gone anywhere near TheGlobe.com

One principle that I believe many investors have forgotten

is that they are investing in a business Whether that business is a

retail store, a steel company, or a semiconductor equipment

man-ufacturer, these are businesses run by managers, with employees,

customers and equipment and, one hopes, profi ts They’re not

just three- or four-letter ticker symbols that you enter into Yahoo!

Finance once in a while to check on the stock price

And these real businesses can create a signifi cant amount of

wealth for shareholders, particularly if the dividend is reinvested

According to Ed Clissold of Ned Davis Research, if you invested

$100 in the S&P 500 in at the end of 1929, it grew to $4,989 in 2010

based on the price appreciation alone However, if you reinvested

the dividends, your $100 grew to $117,774 Clissold says that 95.8%

of the return came from dividends 1 (See Figure 1.1 )

Figure 1.1 1929–2010: $100 Original Investment

Source: Ned Davis Research

Marc Lichtenfeld’s Authentic Italian Trattoria

Years ago, my wife and I were in Ashland, Oregon We loved the

town and started talking about escaping the rat race, moving to

Ashland, and opening a pizza place We’ve repeated that

conver-sation on trips to Banff in the Canadian Rockies, Asheville, North

Carolina, and even Tel Aviv, Israel

Considering that I know nothing about how to run a

restau-rant, would be unhappy if not in close vicinity to a major American

city, and am a lousy cook, the pizza joint remained a happy

fantasy

But for the purposes of this book, Marc Lichtenfeld’s Authentic

Italian Trattoria will serve as an example of a business with revenue

and profi ts We’re also going to assume that I’m your brother-in-law

(your sister was always a very good judge of character) and you’ve

agreed to become my partner in the business

One day I come to you, my favorite brother/sister-in-law, with my

plans for the restaurant I have the space lined up It’s in a popular

location with a lot of foot traffi c I’ve been talking with a wonderful

young chef who is eager to make an impression on local diners and

critics All that’s missing is start-up capital

This is where you come in In exchange for a $100,000

invest-ment, you will receive a 10% ownership stake I show you my

projections: The restaurant will break even the fi rst year, make

$100,000 in the second year and $200,000 in the third year

One of the questions you may have is how you’ll get your

money back Do you have to wait for the restaurant to be sold, or

will you receive some of the profi t each year?

If I tell you that my goal is to build the business to $1.5 million

in sales and then sell it for two times sales ($3 million), where you’ll

receive $300,000, your response might be very different from what

it would be if I tell you that half the profi ts will be invested back in

the business with the other half split up among the partners in a

yearly payout (dividend)

Your decision on whether to give me the money will depend in

part on your goals Are you willing to speculate that you’ll receive

the big payoff in several years when the business is sold, or would

you rather receive an income stream from your investment but no

exit strategy (plan to sell the restaurant)?

When buying stocks, investors have to make similar decisions

Do they buy a stock with the sole purpose of selling it higher down

the road, or do they buy one that provides an income stream and

opportunities for income growth in addition to capital gains?

I don’t know about you, but if I’m investing in someone’s

busi-ness, I want to see some money as soon as possible rather than wait

for an exit strategy

Here is another factor that might affect your decision to invest

in my trattoria: Instead of offering to pay you your cut of the profi ts

ever year, I might offer to reinvest that money back into the

restau-rant and give you more equity That way, your piece of the profi ts

gets larger each year Eventually, you can start receiving a signifi

-cant cash payout on an annual basis or receive a bigger slice of the

pie when you sell your stake in the business because your equity has

increased above your original 10%

This last scenario is the same as reinvesting dividends, a method

that is the surest way I know of to create wealth

And what I love about this strategy is that it works (and has

worked) no matter who is President of the United States; what

hap-pens in Europe, Iran, or the Middle East; unemployment; infl ation;

and so on Sure, those things will impact your short-term results,

but over the long haul, they mean nothing and in fact could help

you accumulate more wealth, as I’ll explain in the section on bear

markets in Chapter 3

The Numbers

Investing in dividend stocks is the best way to make money in the stock

mar-ket over the long term

But don’t just take my word for it Harvey Rubin and Carlos

Spaht, II, both of Louisiana State University in Shreveport, wrote,

“For those investors who adopt ten- and fi fteen-year time horizons,

the dividend investment strategy will lead to fi nancial

indepen-dence for life Regardless of the direction of the market, a constant

and growing dividend is a never ending income stream.” 2

Just a few pages ago, I told you that dogma doesn’t work, yet

here I am sounding fairly dogmatic The proof that dividend

invest-ing creates wealth is in the numbers

First of all, investing in the stock market works Since 1937, if

you invested in the broad market index, you made money in 67 out

of 74 rolling ten-year periods, for a 91% win rate That includes

reinvesting dividends

The seven ten-year periods that were losers ended in 1937,

1938, 1939, 1940, 1946, 2008, and 2009 The periods 1937 to 1940

and 1946 were tied to the Great Depression The ten-year periods

ending 1936 to 1940 were brutal with an average decline of 40%

The decade ending in 1946 was much tamer with a loss of 11% The

2008 and 2009 ten-year periods each lost 9%

So the only ten-year periods that didn’t make money were

asso-ciated with near fi nancial Armageddon And even in some decades

tied to those fi nancial collapses, such as 2000–2010, investors still

came out ahead

Paul Asquith and David W Mullins Jr of Harvard University

concluded that stocks that initiated a dividend and increased their

dividends produced excess returns for shareholders Additionally,

the larger the fi rst dividend payment and subsequent dividend

raises, the larger the outperformance 3

And research shows that dividend stocks signifi cantly

outper-form during market downturns

Michael Goldstein and Kathleen P Fuller of Babson College

concluded, “Dividend-paying stocks outperform non-dividend-

paying stocks by 1 to 2% more per month in declining markets

than in advancing markets.” 4

Later on in the book, I’ll show you how you can achieve

double-digit yields, which would nullify the effects of even the

weak-est historical markets, performance and enable you to make money

regardless of what the overall market is doing

Think back to other methods that I mentioned at the

begin-ning of the chapter: value, growth, and technical analysis They all

work—sometimes No system, strategy, or methodology that I know

of has a 91% win rate that can approach 100% when the dividends

have been reinvested

Oh, I know, but it’s different this time We’re in an

unprece-dented period of debt, unemployment, fi nancial crises, and

every-thing else unpleasant under the sun

Things were pretty lousy in 2008 and 2009, with the entire

fi nancial system on the precipice of collapse Nevertheless, the

mar-ket came roaring back, doubling in two years

Similarly, there was little to get excited about during the

1970s—with mortgages and infl ation in the teens and each U.S

President less popular than the last Yet the ten-year return on the

market was positive every year throughout the 1970s and 1980s

(encompassing years from the 1970s)

Since 1937, the average cumulative rolling ten-year total return

on the stock market is 129% This includes the seven negative

ten-year periods Since 1999 (the fi rst ten-year the ten-ten-year data was

avail-able), the S&P Dividend Aristocrat index’s ten-year rolling return

average has been 187% and was positive every year, with the

low-est ten-year return of 40% in the period ending in 2008 (when

the market tanked 38% that year), compared to a 9% loss for the

S&P 500 in the ten years ending 2008 (and a loss of 26% when you

exclude dividends) I’ll explain what a Dividend Aristocrat is in the

next chapter

I recently read a government offi cial’s estimate (and we know

how accurate they usually are) that, over the next ten years, stocks

will lose 13% due to baby boomers taking their money out of the

market

I don’t think that’s likely As I’ve shown you, historically, there’s

a 91% chance of the market giving you a positive return over ten

years Additionally, where are the baby boomers going to put their

money? Bonds are paying ridiculously low interest rates right now

Is it worth it to lock up your funds for ten years to earn 2%? That

won’t even keep up with infl ation

For that little, I’d rather invest in a stock with a 4% or 5% yield

and take the risk that in ten years, the stock will at least be where I

bought it today

But you know what? Even if the stock falls, you can still make

money

Let’s assume you buy 500 shares of stock at $20 for a total of

$10,000 It pays a dividend of $1 per year or a yield of 5% Now, this

company has a long history of raising its dividend every year Over

the next ten years, it raises the dividend by an average of 5% per year

Let’s also assume that the government offi cial was right and the

stock tracks the market and falls 13%

If you reinvest your dividends for the next ten years, while the

dividend is increasing and the stock price is falling, you’ll wind up

with about $17,000 That’s a 70% increase, or a compounded annual

growth rate of 5.45%—despite a decline in stock price of 13%!

But what if you invested in a ten-year treasury, paying 2%

per year? After ten years, you get your $10,000 back, plus you’ve

collected $2,000 in interest for a total of $12,000, or a compound

annual growth rate of 1.84%

So in this example, your stock investment lost 13% in price yet

still nearly tripled the performance of a ten-year bond where your

principal is guaranteed

Think about that for a moment Your stock lost value, but

because you reinvested your dividends, you nearly tripled your return

on the guaranteed principal of the ten-year bond And that takes into

account a drop in the market over a ten-year period that would be

equal to the fi fth largest in the last 74 years

Oh, and if you decide after ten years to start collecting the

dividend instead of reinvesting it then, you’d receive $1.63 per

share, up from $1 per share And because you reinvested the

dividends, you’re collecting that $1.63 per share on 1,000 shares

instead of your original 500 So your yield is going to be over

16% on your original investment This alone should convince

you to run out and buy dividend stocks As they say on TV, but

wait, there’s more

Keeping Up with Infl ation

People don’t talk much about infl ation these days Since 1914, the

average infl ation rate in the United States is 3.4% In 2009 and

2010, infl ation was well below the historical average The year 2011

saw a return to more normal levels

Infl ation of 3.4% seems pretty tame, especially for any of us

who remember the 1970s and 1980s when infl ation hit double

dig-its But even at 3.4%, your buying power is cut in half after 20 years

Because infl ation is low today, people underestimate its erosive

powers Despite the fact that for the past decade infl ation has

aver-aged nearly three quarters of a point below the historical 3.4% fi

g-ure, buying power has still been cut

What would have cost $1,000 in 2001 cost $1,270 at the end of

2011

And what if you’re saving for something whose price rises faster

than the average 3.4% rate, such as college tuition or retirement

(and the associated medical costs)?

For example, in 2011, the College Board reported that tuition

at public four-year universities increased 8.3% And since 2006, it

has risen at a rate 5.1% above the infl ation rate

Where are you going to fi nd an investment that will grow 8.3%?

Today, if you lock up your money for 20 years in a treasury, you’ll

be lucky to get 3% per year

Let’s see how cost increases could impact tuition fees in the

future Right now, tuition for in-state students at a public university

averages $8,244 Private university students are paying an average

of $28,500 If those tuitions continue to increase by 8.3% per year,

in 18 years, you’ll have to shell out $34,629 per year for the

pub-lic university and $119,717 for the private school And that doesn’t

include room and board (or beer) Sure hope your kid can hit a

jump shot

So if you’re lucky enough to be able to buy $100,000 worth of

treasuries for your newborn child’s education, and they pay 3% per

year, you should be where you need to be to pay tuition for four

years, but you’ll still have to come up with some cash for room

and board, books, and more (beer) But remember, this is just an

in-state school At the private university, forget it You need to

average a 9% compound return per year to hit your target

This is an extreme example, but you can see that treasuries

are a tough way to fund any future expense One of the problems

with fi xed income is that you can’t reinvest it in order to let it

com-pound, the way you can with dividend stocks

As you’ll soon see, a 12% compounded annual return is readily

achievable when you invest in stocks that pay dividends In fact, if

you reinvest those dividends, there is no reason why you shouldn’t

be earning 12% per year, over the long run

12% That was not a typo You can earn that much per year

(and even more) by investing in boring, large-cap, dividend-paying

companies that simply match the overall return of the market And

at 12% per year, all you need to do is start off that college fund with

$1,000 and add $2,000 per year and the in-state school is entirely

paid for by the time your little boy or girl graduates high school

We’re not taking any extra risk here We’re not investing in

speculative companies with new technologies that may or may not

work All we are doing is trying to match the market with

compa-nies that have a long track record of paying shareholders But

through the system I’m about to show you, it can help you achieve

your fi nancial goals

You need to know which types of dividend stocks to buy in

order to achieve the maximum returns So now, let me show you

The 10-11-12 System

When I started the process of writing Get Rich with Dividends , my

objective, besides spreading the gospel of dividend investing, was

to give readers a process for achieving their fi nancial goals The

process had to have three simple but key components

1 It had to be easy to understand and implement

2 It had to work

3 It had to be inexpensive

I’ve read truckloads of fi nancial books and products in my

life-time, many claiming to have an easy system that would make me

rich The problem was they usually didn’t work Often they weren’t

easy to use, nor were they cheap

For example, one book I read recommended buying tax lien

certifi cates and explained how I could make 16% per year on those

investments

Maybe somebody has achieved those kinds of results, but when

I checked with offi ces of various county governments around the

country that were selling those certifi cates, I found I’d be lucky to

make a few percentage points on my money And the process was

far from easy or inexpensive

Other strategies have recommended changing my entire

port-folio every year, incurring hundreds of dollars in commission

charges, even with a cheap discount broker

So I set out to create a system for investors that would be so easy

to use and so inexpensive, they’d be free to devote their energies to

things that really excite them, like their families, friends, work,

hob-bies, rather than having to spend countless hours working on and

constantly adjusting their portfolios

If you’re the kind of person who likes to check stock quotes

during the day, research companies, and follow business news—

that’s great You and I will have a lot to talk about if we meet

But most people want to invest and more or less forget about

it, checking in only occasionally to make sure everything is going

according to plan

The result is the 10-11-12 System It is designed so that, in ten

years, the investor will be generating 11% yields and will have

aver-aged a 12% annual return on his or her portfolio Just to be clear,

you won’t achieve a total return of 12% in year 1 But by year 10,

your average annual return over the entire ten-year period should

be 12% and quite possibly higher

It is so easy to use that my ten-year-old son instantly grasped the

concept and was excited about its prospects for his money when I

explained it to him He took his birthday and allowance money and

bought shares in the kind of stocks I talk about in the book,

under-standing his funds should more than double by the time he gets to

college

And other than the commission on buying the stocks when you

set up the portfolio, it doesn’t have to cost you anything after that

Simple, easy to use, and it works

For example, Southern Company (NYSE: SO), which has raised

its dividend every year for the last ten years, returned 193% over

the past ten years when dividends were reinvested This is a real-life

example, not theoretical A $10,000 investment was worth $29,332

versus the S&P 500, which would have been worth $13,931

So let’s get started so you can begin earning 12% returns

right away

Summary

• Save money—try to save 10% of your income to put to work

in dividend-paying stocks If you can’t save 10%, start smaller and work your way up

• Investing in dividend-paying stocks is the best way to create

wealth in the stock market

• Dividend stocks will help you beat the ravages of infl ation,

unlike treasuries

• The 10-11-12 System is designed to generate 12% annual

returns over the long term, cost next to nothing, be extremely easy to implement, and take up very little of your time over the many years you’ll use it

• Roy Jones Jr made one of the worst songs in the history of

recorded music

Notes

1 Harvey Rubin and Carlos Spaht, II “Financial Independence Through Dollar

Cost Averaging and Dividend Reinvestments,” Journal of Applied Business and

Economics 12, no 4 (2011) pp 11–19

2 Ibid

3 Paul Asquith and David W Mullins, Jr., Journal of Business 56, no 1 (1983),

pp 77–96

4 Kathleen P Fuller and Michael A Goldstein, “Do Dividends Matter More

in Declining Markets?” Journal of Corporate Finance 17, no 3 (June 2011),

pp 457–473

2

C H A P T E R

What Is a Perpetual Dividend Raiser?

When I fi rst got into the fi nancial industry, I was an assistant on

a trading desk, eventually working my way up to trader

Before I knew how to analyze a company by reading balance

sheets and income statements, I learned about stock charts

Two key concepts in reading stock charts are:

1 The trend is your friend

2 A trend in motion stays in motion

Essentially, what these two concepts mean is that a stock will

continue moving in the same direction until it doesn’t any more

How’s that for insight?

But when you look at a chart of a stock that is heading higher,

although there are some minor corrections, it often moves on a

diagonal line (called a trend line) upward Stocks traveling along

one of these trend lines usually continue until something changes

their direction The cause of the change of direction could be a bad

earnings report, weak economic data, or a large institution selling its

shares Frequently, once the trend is broken, the stock will reverse

Investors who trade using chart data look for opportunities

to buy shares of stocks that are trending higher I bring this up

because the same can be said about companies that raise their

dividends

Typically, a company with an established trend of increasing

their dividends will raise them again next year and the year after

that and the year after that unless it becomes impossible to do

so Management knows that investors have come to expect the

divi-dend boost every year and any change in that policy will send them

running for the exits

I call these companies Perpetual Dividend Raisers, and they

come in more than one variety

Dividend Aristocrats

The concept of a Dividend Aristocrat is simple A Dividend

Aristocrat is a company that is a member of the S&P 500 index and

has raised its dividend every year for at least 25 years

These are primarily blue chip companies with long histories of

growing earnings and dividends

If your investing goals are to impress your friends at cocktail

parties with your knowledge of brand-new technology and to brag

about the millions of dollars you will make off of the companies

behind those technologies—well, then, Dividend Aristocrats aren’t

for you

Most people don’t fi nd a company like Genuine Parts (NYSE:

GPC), which makes auto replacement parts, to be terribly

excit-ing I’m not even sure Genuine Parts’ CEO is all that excited about

replacement parts

But the company makes a ton of money—$565 million in

2011—and it has increased its dividend every year since 1956 That

is pretty exciting

Think about that for a minute: Every year Since 1956

Through the Cuban Missile Crisis, the Kennedy assassinations,

Vietnam, Watergate, gas lines, the Cold War, the rise of Japan, the rise

of China, 9/11, the dot-com collapse, the housing bust, and the Great

Recession—through all of these diffi cult, and in some cases tragic,

events, when pundits were saying the sky was falling, at times when

the economy really did stink, Genuine Parts went about its business,

making and selling auto parts and returning more money to

share-holders than it did the year before

The last time Genuine Parts did not increase its dividend,

President Eisenhower was in the White House and Elvis Presley

made his television debut on The Louisiana Hayride on KSLA-TV in

Shreveport, Louisiana

That was a long time ago

And that is pretty darn exciting

The Index

The Dividend Aristocrat Index is currently made up of 51

compa-nies and is rebalanced every year If a company raises its dividend for

the twenty-fi fth consecutive year, it is added to the index the

follow-ing December If a company fails to raise its dividend, it is removed

In order to qualify to be an S&P Dividend Aristocrat, a stock

must meet these four criteria:

1 Be a member of the S&P 500 index

2 Have increased its dividend every year for at least 25 years in

a row

3 Have a market capitalization of at least $3 billion on the day

the index is rebalanced

4 Trade a daily average of at least $5 million worth of stock for

the six months prior to the rebalancing date

In 2012, ten companies, including Nucor (NYSE: NUE), were

added to the index, while one company, CenturyLink (NYSE: CTL),

was dropped

Each company is given equal weight in the index This means

that the size of the company isn’t a factor in the calculation of the

performance of the index A company with a $20 billion market

cap has the same impact on the index as a $40 billion company

Some other variables can impact a company’s ability to be

placed in the index, such as sector diversifi cation But these other

considerations don’t come into play often The most important

factors are 25 years of consecutive dividend increases and being a

member of the S&P 500

The index is great for showing you all kinds of performance

statistics as to why Dividend Aristocrats make excellent investments

and how they outperform the S&P 500 But you can’t buy the

index Surprisingly, there isn’t an exchange-traded fund (ETF) or

mutual fund that tracks the S&P 500 Dividend Aristocrat index

ETF: A fund that is bought and sold like a stock It often tracks an index or

sector and is passively managed—meaning an investment manager is not

actively making buying and selling decisions based on the economy, market,

or a company’s prospects Stocks in an ETF are bought and sold based on

their inclusion or weighting in an index or sector

There is, however, an ETF that is based on the S&P High

Yield Dividend Aristocrats index This index is made up of the 60

highest-yielding members of the S&P Composite 1500 that have

raised their dividends for 25 years in a row

This ETF is called the Standard & Poor’s depositary receipt

(SPDR) S&P Dividend ETF (Amex: SDY) It attempts to track the

performance of the S&P High Yield Dividend Aristocrats Index

And while it might be tempting to buy the SPDR S&P Dividend

ETF for convenience purposes, I do not recommend buying or

own-ing it for several reasons

• You have no control over the sector weightings For example, as I

write this, 24% of the portfolio is invested in utilities That is not particularly surprising, as utilities are often the highest-yielding stocks But you should have more control over your own portfolio and invest according to the way you see fi t

around only since 2007 Aristocrats have at least a 25-year track record Achievers, which we’ll discuss later, have at least

a ten-year track record The purpose of investing, according

to the ideas laid out in this book, is to put your money in stocks with a long history of rewarding shareholders by increasing the dividend As it turns out, the SPDR Dividend ETF lowered its dividend in 2009

• In many cases, we can fi nd higher yields in individual stocks rather

than this ETF

There are no mutual funds dedicated to Dividend Aristocrats at

this time

The Champions

Dividend Aristocrats represent the bluest of the blue chips—big,

solid companies with two and a half decades or more track records

of raising dividends

However, with only 40 to 50 stocks qualifying to be included

in the index in a given year, we need to expand our universe—

especially because not every Aristocrat has a decent yield Just

because a company has raised its dividend for 25 years in a row

doesn’t mean it has an attractive dividend yield